Geithner’s Plan: one of the most regressive wealth transfers of all time

I do not like the Geithner Plan because it is needlessly expensive. Nevertheless, it could well work. My main objection is that it constitutes the most regressive transfer of wealth in history and it’s being done BY A DEMOCRAT ADMINISTRATION!!!! Unbelievable.

It has to be done this way in terms of securing funding for the banks because after AIG, there is no way Congress would give them the money. As I predicted in a post I wrote here a week ago, the 1994 Mexico rescue package, where Robert Rubin raided the Exchange Stabilisation Fund to get the money to Mexico (or, more accurately, the Wall Street banks who lost a fortune playing the Tesobono market in Mexico) is the template here.

Sorry, Ed, I know you like Rubin.

Now, the market has gone up (rationally in my opinion) because they are aware that the Wall Street interests have triumphed. If the FDIC does 80 percent and treasury does 80 pc of remaining 20 pc then private sector only on hook for 4 pc. Does anyone report that FDIC is out of money — so, it is all treasury? By using different agencies here, there is this façade that government is on hook for less (feigned laughter). Maybe. The bond market is figuring this out?

Do you realize that various government programs may now be north of $5 trillion, while the total market cap of us equities is $8 trillion. Basically fed and treasury have already nationalized banking and shadow bank system without saying so. And there was no reason to do this (as my friend Warren Mosler says) because: “We already have a regulated banking system. We just have to regulate them!!”

Equities are seeing this and ready to vault. Meanwhile, the furore over AIG is very similar to the 1933 Pecora hearings which began in January 1933. The Dow went up over 100 percent as the hearings disclosed terrible behavior. AIG is very similar.

The Geithner Plan should not be a surprise to anyone. And neither should be the revelation that there is little difference between methods taken by Democrats and Republicans. It should be obvious to all objective observers that there is very little difference between the two main American parties. Both parties support the growth of big government and the meddling with markets by the use of the regulatory process. As such both parties tend to appoint incompetent bureaucrats who fear the free markets and use their power to protect and reward politically connected supporters.

The Geithner Plan may seem to work for a short period of time but it cannot do away with the necessity to liquidate malinvestments before the real economy can have a sustainable recovery. Sadly, most voters don’t seem to get it because they have too much invested emotionally in one of the two major parties to ever see that there is a real alternative.

I have really been of two minds here. If you read some earlier posts, you can tell that I agree with your ideas regarding the need to liquidate malinvestments. The political reality necessitates a measured response i.e. stimulus in order to assuage the brunt of the impact from this credit contraction. But, no sustainable recovery is in the offing until the malinvestments (in housing, leveraged finance, autos and other durable goods consumption areas) are substantially worked off.

That said, both parties do have a vested interest in maintaining the status quo and this means perpetuating the existing malinvestents. The Democrats are beholden to special interests too! My hope (and I suspect Marshall’s too), however, is that grass-roots Democrats and Liberterians will force a re-balancing of the U.S. economy toward sustainable consumption and debt levels and an increased real wage for ordinary Americans.